Real options Respond to the following comments. a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.” b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.” c. “Real-options methods eliminate the need for DCF valuation of investment projects.”

Question

Want to see more full solutions like this?

Answer 1

Textbook Question

Chapter 22, Problem 1PS

Real options Respond to the following comments.

a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.”
b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.”
c. “Real-options methods eliminate the need for DCF valuation of investment projects.”

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

D. (1) Consider the following cash inflows of a financial product. Given that the market interest rate is 12%, what price would you pay for these cash flows? Year 0 1 2 3 4 Cash Flow 160 170 180 230

Explain why financial institutions generally engage in foreign exchange tradingactivities. Provide specific purposes or motivations behind such activities.

A. In 2008, during the global financial crisis, Lehman Brothers, one of the largest investment banks, collapsed and defaulted on its corporate bonds, causing significant losses for bondholders. This event highlighted several risks that investors in corporate bonds might face. What are the key risks an investor would encounter when investing in corporate bonds? Explain these risks with examples or academic references. [15 Marks]

Answer 2

Textbook Question

Chapter 22, Problem 1PS

Real options Respond to the following comments.

a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.”
b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.”
c. “Real-options methods eliminate the need for DCF valuation of investment projects.”

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 22, Problem 1PS

Real options Respond to the following comments.

a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.”
b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.”
c. “Real-options methods eliminate the need for DCF valuation of investment projects.”

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 22, Problem 1PS

Real options Respond to the following comments.

a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.”
b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.”
c. “Real-options methods eliminate the need for DCF valuation of investment projects.”

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Answer 8

a.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: To respond to the statement on whether to use a decision tree rather using option theories.

Answer 13

Explanation of Solution

The possible response to the given statement is as follows:

Discount rates cannot be used for any of the option payoffs, because the risk of the option varies as the asset value changes time to time.

Answer 14

b.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

Summary Introduction

To discuss: To respond to the statement on whether option pricing methods are plain nutty.

Answer 19

Explanation of Solution

The possible response to the given statement is as follows:

The risky asset might be worth less as an outcome of its riskiness, yet the option on the risky asset is progressively significant on the grounds that the option proprietor can underwrite from upward moves while not losing because of downward moves.

Answer 20

c.

Expert Solution

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Answer 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

Summary Introduction

To discuss: To respond to the statement on whether real options methods eliminate the discount cash flow valuation.

Answer 25

Explanation of Solution

The possible response to the given statement is as follows:

The worth of an option relies upon the value of the underlying asset. The discounted cash flow valuation of investment projects is vital so as to decide the worth of the underlying asset.

Answer 26

Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PS Ch. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PS Ch. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PS Ch. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS

Solution Summary: The author responds to the statement on whether to use a decision tree rather than using option theories. Discount rates cannot be used for any of the option payoffs.

Concept explainers

Videos

Explanation of Solution

Explanation of Solution

Explanation of Solution

Want to see more full solutions like this?

Chapter 22 Solutions